Buckley Sandler Insights: FinCEN updates FAQs regarding customer due diligence requirements for financial institutions

Agency Rule-Making & Guidance FinCEN Bank Secrecy Act Anti-Money Laundering Customer Due Diligence Department of Treasury CDD Rule Beneficial Ownership

On April 3, the Financial Crimes Enforcement Network released an update to its FAQs in advance of the upcoming Customer Due Diligence Requirements for Financial Institutions final rule (issued in 2016 and amended last September for various technical corrections) that goes into effect May 11. As previously covered in InfoBytes, the final rule imposes standardized customer due diligence (CDD) requirements under the Bank Secrecy Act for covered financial institutions and requires financial institutions to identify and verify beneficial owners of legal entity customers, subject to certain exclusions and exemptions. The supplemental FAQs (see InfoBytes coverage on an earlier set of FAQs issued in 2016) assist covered financial institutions in understanding the scope of their CDD requirements, as well as the CDD rule’s impact on broader anti-money laundering (AML) program obligations, and cover a broad range of interpretations including the following:

• Question 1 specifies covered financial institutions will satisfy the requirements to identify and verify beneficial owners of legal entity customers by collecting and verifying the identity of individuals who directly or indirectly own 25 percent or more of the equity interests in a legal entity customer, as well as “one individual who has managerial control of a legal entity customer.” However, they may choose to implement stricter written internal policies and procedures and expand their information collection to include more than one individual with managerial control or persons owning a lower percentage of equity interests.
• Question 3 clarifies that covered financial institutions may reasonably rely on a legal entity customer to provide the identities of individuals who satisfy the definition of beneficial ownership, whether indirectly or directly, and “need not independently investigate the legal entity customer’s ownership structure.”
• Question 7 states that for existing customers, a covered financial institution may rely on information in its possession subject to its Customer Identification Program (CIP) to fulfill the beneficial ownership identification and verification requirements, “provided the existing information is up-to-date, accurate, and the legal entity customer’s representative certifies or confirms (verbally or in writing) the accuracy of the pre-existing CIP information.”
• Question 10 states that if a legal entity customer opens multiple accounts, the covered financial institution may rely on information obtained from a previously issued certification form (or equivalent), provided the legal entity customer certifies or confirms—verbally or in writing—that such information is up-to-date and accurate at the time each subsequent account is opened. Records of such certification or confirmation must also be maintained.
• Question 12 confirms that covered financial institutions seeking to renew a loan or roll over a certificate of deposit must treat these as new accounts and require their legal entities customers to certify or confirm beneficial owners, “even if the legal entity is an existing customer.”
• Question 18 stipulates that covered financial institutions are not required to identify and verify the identity of beneficial owners that own 25 percent or more of the equity interests of a pooled investment vehicle, whether or not such vehicle is managed by a “financial institution,” due to the typical fluctuation of ownership. However, Question 18 notes that covered financial entities must collect beneficial ownership information for an individual who has significant control or management over the vehicle as required under the control prong to comply with the CDD rule.
• Question 19 concerns trusts overseen by multiple trustees and states that in circumstances where a trust owns 25 percent or more of the equity interests of a legal entity customer, covered financial institutions are required, at a minimum, to collect beneficial ownership information on a single trustee but may choose to identify additional co-trustees based on risk assessment or a risk profile.
• Question 21 specifies that a covered financial institution may rely on information provided by a legal entity customer to determine eligibility for exclusion from the definition of a legal entity customer, provided the financial institution has no knowledge of facts that would reasonably call into question the reliability of such information. Covered financial institutions should also ensure that their risk-based written policies and procedures address and specify the type of information to be used when reasonably determining exclusion eligibility. 
• Question 28 stipulates which non-U.S. governmental entities qualify for exclusion from the definition of a legal entity customer. It specifies that state-owned enterprises that engage in profit-seeking activities, such as sovereign wealth funds, airlines, and oil companies, are not excluded from the definition of a legal entity.
• Questions 29-31 provide guidance on account level beneficial owner exceptions related to (i) point of sale products for certain low-risk retail credit accounts; and (ii) certain equipment finance and lease accounts with low money laundering risks. Question 31 also stipulates that an equipment lease and purchase exemption would apply in circumstances where a customer leases necessary equipment directly from a covered financial institution.
• Questions 32-33 provide guidance on circumstances where beneficial ownership information should be aggregated for purposes of complying with Currency Transaction Report (CTR) requirements, and state that “absent indications that the businesses are not operating independently . . . , financial institutions should not aggregate transactions involving those businesses with those of each other or with those of the common owner for CTR filing.” Furthermore, covered financial institutions are generally not required to list beneficial owners on a CTR.
• Question 35 specifies what information covered financial institutions should collect and consider as part of on-going CDD when developing customer risk profiles. Specifically, covered financial institutions should develop an understanding of the “nature and purpose of a customer relationship,” and review information obtained at the opening of an account such as type of customer, account, service, or product.